Columbia Association may borrow $10 million to refinance expensive debt

June 23, 1994|By Adam Sachs | Adam Sachs,Sun Staff Writer

The Columbia Association board of directors tonight will consider borrowing $10 million to continue a program that lets the association buy back its own debt to save money on future interest payments.

Since last summer, the nonprofit association has been buying back and retiring small portions of debt it issued years ago at higher interest rates. It then sells bonds at today's more favorable rates to help finance that "bond repurchase program," a form of refinancing.

"What we're trying to do is reduce the burden on Columbians, paying off the bonds over the life of our bonds," said David W. Berson, vice chairman of the Columbia Council, which, along with Columbia Association President Padraic Kennedy, acts as the association's board of directors.

"In a sense, it's replacing old debt with new debt, but the new debt has a much lower interest rate."

Tonight, the board also will consider approving the repurchase of $1.2 million of the association's debt held by investors, said Robert Krawczak, the association's director of finances.

From 1973 through 1988, the association sold $63 million in bonds at interest rates ranging from 7.9 percent to 18.7 percent, and averaging about 12 percent. Those bonds were used to finance capital projects, pay back a credit line used for short-term cash and plug shortfalls in the association's operating budget.

By the close of fiscal 1994 on April 30, the association had repurchased $4.7 million of its debt. Mr. Krawczak said he expects the bond-repurchase program to result in interest expense savings of about $375,000 in each of the next three to four years.

Provisions of previous bond sales preclude the association from pursuing a refinancing of its debt on a larger scale, as many governments have done in recent years, association officials say -- a position disputed by some critics. The association's debt now is about $86 million.

In February, the association borrowed $10 million through a bond sale at a 7 percent interest rate -- the lowest in its history -- to pay for projects and to use as cash to repurchase debt. The association borrowed $5 million through a bond sale in fiscal 1993.

Councilman Chuck Rees said he is concerned about "all the big borrowing," noting that the association's net debt has increased by about $4 million per year over the last six years.

"My general criticism is that we're saving thousands when we could be saving millions," said Mr. Rees, who argues that the association has not sufficiently investigated whether it could refinance larger amounts of its debt.

Mr. Berson, meanwhile, said that in its latest proposed bond sale the association probably would be offered a rate closer to the 10-year U.S. Treasury bond rate than ever before, a mark of confidence from the financial markets.

"It's crystal clear to financial markets that we are a better credit risk than any time in our history," said Mr. Berson, an economist at the Federal National Mortgage Association. "There is no better indication of our credit worthiness."

In other business, the board will consider adding $18,500 to this year's $5.8 million capital budget to participate with the University of Maryland in a study to determine ways to reduce erosion in the Wilde Lake watershed.

It also will consider approving the appointment of the association's nine top officers -- including Mr. Kennedy and division directors -- for another year in office.